Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2,422,431. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $1,950,026 in annual sales, with costs of $1,675,501. If the tax rate is 0.36 , what is the OCF for this project?

OCF means operating cash flow, it is the annual inflow of cash that could be generated from the project based on its annual sales revenue, annual operating costs, the depreciation expense as well as the tax rate.

OCF is the net income plus the depreciation expense, since the depreciation expense is not an outright cash outflow, hence, it needs to be added back to net income.

Annual depreciation=initial fixed asset investment/useful life

initial fixed asset investment=$2,422,431

useful life=3 years

annual depreciation=$2,422,431/3

annual depreciation=$807,477

Net income=(sales-costs-depreciation)*(1-tax rate)

sales=$1,950,026

costs=$1,675,501

tax rate=0.36

net income=($1,950,026-$1,675,501-$807,477)*(1-0.36)

net income/(loss)=-$341,089.28

OCF=-$341,089.28+$807,477

OCF=$466,387.72

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